The BDC that is also a REIT

BDCS qualify as BDCs under the tax code. BDCs by tradition also happen to usually be RICs under the tax code. REITs qualify as REITs under the tax code. RICs and REITs have very similar requirements in terms of distributing income, and nearly identical benefits in terms of avoiding corporate level taxation. However, investment limitations are different.

BDC is an SEC construct. REIT is an IRS construct. These categories are not mutually exclusive. Mackenzie Realty Capital is a BDC that is also a REIT under the tax code.

From the 10-K:

MacKenzie Realty Capital, Inc. (“MRC,” “we” or “us“) is an externally managed non-diversified company that has elected to be treated as a business development company (“BDC“) under the Investment Company Act of 1940 (the “1940 Act“). Our investment objective is to generate both current income and capital appreciation through investments in real estate companies (as defined below). We are advised by MCM Advisers, LP (“the Adviser” or “MCM Advisers“). MacKenzie Capital Management, LP (“MacKenzie“) provides us with non-investment management services and administrative services necessary for us to operate. MRC was formed with the intention of qualifying to be taxed as a real estate investment trust (“REIT”) as defined under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). We qualified to be taxed as a REIT beginning with the tax year ended December 31, 2014, and made our REIT election in our 2014 tax return.

Anyways, Mackenzie Capital’s group of funds are fascinating on many levels. Mackenzie Sponsors/advises non-traded funds that specialize in exploiting inefficiencies in the market for illiquid retail programs. Basically they buy non-traded retail programs at steep discounts via tender offers and then either hold them through liquidation, or sell them at a higher price on auction sites. They will sometimes puts out deep discount tender offers right after a non-traded program suspends its stock repurchase program. The suspension of the share repurchase program generally indicates either the fund is in trouble, or it is pursuing strategic alternatives. It doesn’t take long for a literate person to figure out which. Mackenzie trades with and provides liquidity to uninformed unsophisticated counterparties that have extreme desire for liquidity (in most cases they buy from retail investors who actually bought fully loaded shares during the offering)

Mackenzie’s funds appear to follow the “no bad assets， just bad prices” school of investing. An illiquid non-traded REIT, BDC or LP that is managed by a parasitic external advisor deserves a NAV discount. Yet, in most cases they are worth more than zero. Mackenzie in the illiquid space is sort of like the Bulldog Investors /Special Opportunities Fund is in the traded space, except on steroids without the activism. There are a few other groups that follow a similar strategy, such as CMG Investments, although mainly via personal account or LP structures.

Remember when Third Avenue’s distressed debt fund had a liquidity mismatch problem and had to suspend redemptions？ Mackenzie’s funds bid on the shares at a 61% discount to NAV. The offer letter reminds me of a vulture eating a vulture .